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Australian Mother of Pearl (MOP) Industry, 1910

Australian Mother of Pearl (MOP) Industry, 1910 . Output : MOP shells. carved into buttons, piano keys and boxes, similar to ivory. Mechanical & hand pumps . Inputs. Capital: Luggers (i.e., pearl boat), diving suits, pumps,… Labor: divers, tenders, pumpers,… .

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Australian Mother of Pearl (MOP) Industry, 1910

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  1. Australian Mother of Pearl (MOP) Industry, 1910 Output: MOP shells carved into buttons, piano keys and boxes, similar to ivory. Mechanical & hand pumps Inputs • Capital: Luggers (i.e., pearl boat), diving suits, pumps,… • Labor: divers, tenders, pumpers,… Tenders needed to keep the lifeline taut to help stabilize divers but not so taut to impair them from picking up shells. They were usually experienced divers. Divers limited their time underwater and ascended in stages because of the bends

  2. The West Australian Pearlers’Association “was not a united organization,” being composed of “big operators” and “one-boat captains,” who “bid against each other to obtain the best divers” and “undercut” each other as suppliers to MOP markets. Big operator: Burns, Philps & Co (BP) owned 2 dozen luggers One-boat captain: Federick Everett (FE) • Competitive labor market… voluntary exchange • Competitive output market

  3. Federick Everett’s Short-Run Demand for Labor • Assume: • FE’s Goal: max π • Two inputs, capital and labor • Labor is variable, capital is fixed • Labor and product markets are competitive Marginal Product of Labor (MPL): the additional output produced by an additional worker, holding the amount of capital constant.

  4. 0 Assume: laborers are identical, which is not quite true. 0 4 3 2 1 0 Diminishing Marginal Returns: must eventually decline as each additional worker has a smaller share of capital to work with.

  5. Marginal Revenue Product of Labor (MRPL): the additional revenue from employing one additional laborer Price of MOP in 1910 ≈ ₤ 150 per ton

  6. Suppose the wage was ₤75 per season in 1910 FE’s Short-Run Demand for Labor Wage (₤ per season) Demand Labor (# per season)

  7. Suppose the wage was ₤75 per season in 1910 FE’s Short-Run Demand for Labor Wage (₤ per season) Demand Labor (# per season)

  8. Short-run Employment Decision • A firm that hires labor and sells its output in competitive markets will hire labor on the until it reaches (& is falling) • This does not imply that “the firm should set W equal to MRPL” A competitive firm takes their W as given or pre-determined, implying that “a competitive firm should hire until MRPL = W” Output Market Structure Market Demand = horizontal summation of the labor demanded of individual firms.

  9. Long-run Employment Decision Capital Stock, K, and labor, L, are both variable Isoquant: all combinations of K & L that produce the same Q. “It was a well-known fact that a fleet (even a small fleet) worked much more steadily and consistently when it has a schooner to service it. The luggers could work further away from port and did not need to return so often.” Schooners, mech. pumps Q = 200 tons Big operators Slope = capital labor ratio Q = 15 tons manual pumps One-boat captains Q = 10 tons

  10. Capital Properties of Isoquants • isoquants are downward sloping • isoquants do not intersect • higher isoquants are associated with higher levels of Q • isoquants are [strictly] convex to the origin One-boat captain: (FE) Q=13 tons A Q=10 tons Labor

  11. “There was no such thing as a standard lugger. They were built to multiple designs in shopyards in Fremantle and Broome, Singapore and Sydney, in the back yards of home builders, and next to cattle sheds in the Kimberleys.” Capital Point B—older lugger that takes more crew time to maintain it. (–) (+) Loss in Q due to less K Gain in Q due to more L Rearranging, A B Q=10 tons Labor

  12. slope of isoquant Capital Marginal rate of technical substitution (MRTS) ratio of MP with the MP of the input on the horizontal axis in the numerator. A B Q=10 tons Labor

  13. Isoexpenditure Curves: (aka isocost curves) all combinations of K & L that cost the same. K price of capital (user cost) wage total expenditures on inputs Solving for K ratio of input prices with P of the input on the horizontal axis in the numerator slope = L K Vertical intercept Higher ones represent more costly input bundles, e.g., what happens to vertical intercept if TE’ > TE L

  14. Suppose Federick Everett (FE) wants to collect 10 tons of MOP. He can do it by spending TER on LR and KR. Capital Would he want to do this? R Q=10 tons Labor

  15. At R, Rearranging, ΔQ per $ spent on K ΔQ per $ spent on L > Labor is giving you more “bang for the buck” Better off ΔL>0 & ΔK<0

  16. Minimize Costs of Producing Q=10 tons Capital R T Q=10 tons Labor

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